Eric Roseman's Eruptions: Stocks, Global Markets and Commodities BLOG

Offshore funds and The Financial Times

One of the best sources for tracking your offshore mutual fund investments remains The Financial Times (FT). It's also one of the finest sources for financial investment commentary, along with The Wall Street Journal.

The FT, an orange-colored business daily published in London, used to list over 4,000 offshore mutual funds every day in their North American edition; today, that list or survey of offshore funds is gone, and instead replaced by an expanded section on global stock-market listings. In Europe and abroad, however, investors will still find that comprehensive daily survey. When I travel to Europe or Japan, I make sure to spend time reading that section because the Financial Times does not publish that definitive survey online. By the way, if you want to track your offshore funds, the FT does have a superb library of offshore mutual funds on the Internet -- mostly free to browsers. Visit www.ft.com

So what happened to that broad survey of 4,000 offshore funds in the Financial Times' North American edition? Maybe the publisher decided to make room for more international stock listings; or perhaps they decided to simply pull the plug on offshore funds altogether for their North American readers because the funds are not registered with the securities authorities in the United States or Canada. But if that's the case, then why does this section still circulate in other countries where none of those funds are registered, except maybe Luxembourg, Ireland or the Caymans? I can't help but feel that there's a greater reason for stripping away that lucrative data. 

The best sources now for tracking offshore mutual funds, which number over 54,000 products, is still The Financial Times. But to get a copy of the non-North American edition, is a hassle. I suggest having a friend, relative or associate overseas send you a copy every other month so you can scan the pages for some amazing products. I'm still discovering some incredible new or even existing mutual funds every other month I peruse this fine newspaper. After all, with over 4,000 products, there's no way you're going to know about every fund out there.

If you're interested in offshore funds, I've got an even better idea...

Subscribe to my Global Mutual Fund Investor (GMFI), which since 1992 has tracked some of the world's best money-managers for my subscribers. Tired of the dollar heading into the basement? Then discover the world's top-performing non-dollar Global equity fund since 1997 based in Norway, up over 500%. Bullish on water utilities?  How about a British investment trust with a mind-blowing 750% total return since 2002?

Yup, going offshore has its advantages -- if you can find the right information.   

 

Bullish on the Japanese Yen

One of the best values today in currencies remains the oversold Japanese yen.

The yen has been beaten to a pulp over the last 12 months versus the euro and even the sad dollar has logged a slight gain versus the Japanese currency since October 2005. But I think the Japanese yen is hugely undervalued, supported by a growing economy, a booming auto sector and an economic renaissance since 2005 as the government cuts taxes, spurs bank lending and bank credit growth.

Japan is still trying to eradicate deflation, or a period of falling prices. From 1990 to 2004, the Japanese economy suffered its worst post-WW II recession; some periods, like 1998, might be better coined an outright depression.

I was in Tokyo back in June and I can tell you that businesses are spending briskly, consumers are finally opening their wallets and Japanese manufacturing has increasingly expanded to lower cost centers like China and other East Asian countries. The big chink in the yen's armor now is The Bank of Japan, vaccilating on interest rate hikes because they fear the economy is still too weak to absorb a 0.25% rate hike. I don't think so.

The way to play Japan is to either buy Japanese stocks, among the worst-performing bourses in 2006 following a torrid 3-year rally from 2003 to 2006, or even better, Japanese real estate investment trusts (REITs).

The way I see it, the yen is cheap. I want to own yen but I'm not looking for a lousy money-market rate of barely 0.10%. Instead, Japanese REITs yield about three times what Japanese govenment bonds currently yield and offer good intermediate-term appreication. In fact, with the economy growing again, Japanese government bonds are probably one of the worst investments for a Japanese yen investor over the next 12-18 months as yields eventually rise. But REITs are looking good as Japanese real estate values finally start appreciating again for the first time in 15 years, pay a nice yield in anotherwise low-yielding yen, and should provide dollar-based investors with a smart capital gain by 2008 as the dollar eventually declines again.   

Top Picks for 2007

In two weeks, I'll be speaking at the Offshore Advantage Seminar in Puerto Vallarta, hammering away at the ABCs of global investing and how to tap into the best risk-adjusted investments for 2007. I'm very excited about this event because it marks the first time that Sovereign Society is introducing the offshore world to beginners. I think it's more important than ever to diversify your nestegg outside of the auspices of your home country, to maximize better investment opportunities and to shelter some of your hard-earned wealth away from creditors and frivolous lawsuits, especially in the United States.

In addition to giving investors the bottom line on how to get started with their offshore portfolio, I'm also going to plug several terrific investments for 2007, and beyond. Most of these securities don't require more than a $1,000 investment and harbor huge profit potential. Over the past 16 years, I've done pretty well recommending contrarian investment ideas. One rule of thumb for new and existing investors: Never follow the herd. Some of the most profitable investments I've made have usually emanated from deeply oversold and distressed securities. I'll show investors in Mexico how to spot a deeply undervalued market or sector, how to trade for maximum profits, low cost and where to scan the internet for regular quotes on these investments.

One of the greatest myths or falsehoods regarding offshore investing is that you need a big chunk of change to get started. That's not true today. Once you get through some of the arduous paperwork at the beginning, it's pretty easy sailing. What's important is having a good banking relationship in a country with strong securities laws, deposit protection (if you can get it) and privacy. I'll tell you where to get the biggest bang for your European private banking buck in November -- and how to make money with your offshore portfolio.

Have a good weekend.

   

Markets Rejoice, But Risk Remains

Are stocks poised for a correction after a big rally since August?

Global stocks continue to hit fresh 5 1/2-year highs almost daily since late August. And many bourses in the emerging markets are now at all-time highs for the second time since early May. The MSCI World Index, a global market-cap weighted benchmark of major economy markets, has gained 13% this year; On June 30, the index was up just 4.9%. Plus, the long dormant Dow Jones Industrials, seemingly in a coma since 2003, recently hit a new all-time high and is up a pretty impressive 13.5% in 2007.

So, should you add to your equity portfolio at this stage of the bull-market?  Yes, but make sure you step into this market in stages. 

I'm still pretty bullish for 2007. I'm recommending large-cap stocks (brand names), some emerging markets exposure, commodities, technology stocks and REITs in Asia. The way I see it, the Federal Reserve is not going to raise interest rates any higher. It's quite obvious to every investor at this point that housing is still a major threat to the American economy; with bearish data still pouring out of this asset class in October, the Fed will wait for additional statistics on housing before cutting rates. The same is true for the auto sector, almost bankrupt. Both GM and Ford are like two 500-pound gorilla's about to explode. Higher interest rates are the last thing they need now. But even if Bernanke hikes rates by another 0.25%, my forecast for 2007 is still unchanged. I think we'll have a good year for stock, bonds and commodities.

Central banks are usually the worst con-men in the world. Case in point: Tough talk on inflation and interest rates in May and the resultant nosedive for world markets. I personally believe the Fed and the Europeans purposefully "talked down" the markets in early May because gold was running like wildfire, hitting a 26-year high of $731 an ounce. If you're a major central bank, you don't want to see high gold prices. By smashing down the gold price down to where it stands today ($600 an ounce), the Feds bought some time. But despite the tough talk on remaining vigilant on inflation, the Americans, Europeans and Canadians are still printing skads of money, creating an abundance of credit. This explains, in great detail, why financial assets are still soaring after a major correction in May and June. It also explains why gold has probably bottomed around $600 an ounce.

Over the next 12 months, you're going to see even higher stock prices. Bonds will also do well, but not better than stocks. And commodities, which bottomed two weeks ago, will resume their bull market that started in Q4 2001. But let me give you a piece of advice: Just in case the housing market collapses, or just in case a major financial debacle occurs in 2007, make sure you have some gold, U.S. T-bonds and money-market funds. The big risks for the market this year and into 2007 is housing, the auto sector and a rogue or several rogue hedge funds.

If the Fed cuts rates over the next several months, which I peg as better than a 75% probability, then I'll grow even more bullish. Lower short-term rates might not deter a financial panic, but it will lower the risks as more liquidity is created. I'm betting (and hoping) on lower rates in 2007.

Avoid this Oil Company

Amid the greatest bull market for oil since the late 1970s, the majority of large-cap oil companies are making a bundle since 2002. Over the last four years, West Texas Intermediate crude oil has surged a cumulative 205%. But some companies are actually having a hard time not losing money, including British Petroleum PLC (BP). In fact, I'd say this is the worst-managed oil-major of them all, plagued by refining problems (seemingly endless), U.S. production woes and just plain old bad management. 

What's plaguing BP is starting to spread across the industry.

Increasingly, as we approach Peak Oil over the next decade, more oil companies will announce production problems, refining bottlenecks and supply problems. Some oil majors, like the world's largest producer, Exxon-Mobil, is gambling with its future exploration contracts, betting that oil-services fees will drop over the next three years. I think the opposite will happen; over the next few years I expect oil prices to easily surpass $100 a barrel, if not sooner, coupled with even higher oil-services and rig lease rates, already at all-time highs. As oil stocks got slammed late last summer, I recommended the oil-services sector in The Sovereign Individual. I can't think of a better investment over the next five years. If you want to make money, buy the oil-services companies, still trading about 20% below their all-time high last May. This investment theme is sort of like the big gold-mining discovery in the old West back in the 18th century; don't mine for gold -- instead, sell shovels to the miners! It's the same idea with oil-services versus oil majors.

As for the oil majors, I would avoid most of the large-caps, including BP. Instead, I'm drawn to companies that can replace their annual production, at least for the next decade. The oil-sands will extend Peak Oil production in Canada, unlike the North Sea, Gulf of Mexico, Middle East and parts of Asia. As long as oil stays above $45 a barrel, the oil-sands will remain cost-efficient. Also, Russia, with its growing export monopoly, mainly of natural gas, is an energy powerhouse.

Big oil is peaking. Be careful where you invest for long-term energy exposure. The "easy money" has now been made in oil and gas. Now, investors have to do their homework.

   

The Weakest Link in the Euro

I have a hard time believing Italy and France legitimately joined the Euro-zone in 1999. I can't help but think both countries, and possibly others, fudged their books to gain admittance.

A few years ago, Greece joined the single European currency after successfully keeping its debt ceiling below the strict 3% criteria imposed by the Maastricht Treaty. I also have a hard time believing the Greeks didn't fudge their books, either.

In order to join the Euro-zone in 1999, the original members had to maintain a debt-to-GDP ratio of less than 3%; today most countries, including Germany, Holland and France, have breached that limit while the Italians are closer to 5% of debt-to-gross domestic product (GDP). In my eyes, this whole business of imposing spending limits makes no sense, especially amid an economic slowdown when governments should boost spending to get the economy going again. But that's another argument altogether.

Last week, Italy's debt was downgraded to A+ from Standard & Poor's and AA- from Fitch Ratings. This comes as no surprise because Italy, the world's seventh-largest economy and the Euro-zone's third-largest economy, has suffered several recessions since 1992. The country is the worst-performing economy in the European Union (EU) since 1996, dragging the rest of the continent lower. Its debt now stands at 108% of gross domestic product, the highest among the 12-nation Euro-zone and is rising again after shrinking for a decade.

In fact, with Italy slowing and marred in a struggle to reduce spending, you could say some people are beginning to seriously question the euro's legitimacy.

Let's face it, Germany and Italy, responsible for almost 52% of the Euro-zone's growth, have both struggled since 1999; Germany and Italy also suffered economic recessions in 2002 and 2003, respectively. Meanwhile, the inflation-fighting European Central Bank (ECB) is still fighting inflation, obsessed with raising interest rates this year while most of the continent struggles with a 1.5% to 2.5% growth rate. Basically, the ECB forms monetary policy for Ireland, the high-flying low tax center in the EU. To me, this whole experiment of imposing interest rates on different economies is futile. It's possible that one or more countries might even leave European Monetary Union (EMU).

Despite the travails of the euro and multi-staged growth cycles for many of its members, including those countries in Eastern Europe, the euro will probably survive. To kill it would mean significantly higher interest rates for countries with high debt, like Italy, Germany, the Balkans and Greece. The euro is here to stay. But unlike the once-mighty German Mark and Swiss franc, today's European currencies are structurally weak, plagued by debt and monetary policies designed to squeeze innovation and growth.

Over the last decade I've always referred to the U.S. dollar, euro and yen as the "three drunks," wobbling and stumbling to find support. They're all intoxicated with debt.

Personally, I'll stick with gold. You can't print gold and it's no one else's liability. I'm sticking to my long-term forecast of $2,500 an ounce by 2015, if not sooner.

 

 

   

Junk Bonds versus Emerging Market Debt

Emerging market bonds are extremely expensive, offer poor historical yields and potentially, might incur currency risk ahead of the next time-bomb in this asset class. In fact, I'd say emerging market bonds are the biggest "bubble" in the world today, despite mostly harboring positive economic fundamentals.

Following a spectacular rally over the last fourteen years, which saw spreads versus U.S. Treasury bonds plunge from almost 15% to just under 2% today, values are scarce and risk is very high. The "spread" is bond-market lingo for the difference in yield between risk-free Treasury bonds and other non-government-issued debt.

Earlier in May, several emerging markets came under pressure and suffered mini-crashes, including Iceland and Turkey. Global investors, namely hedge funds and mutual funds, have been shoving "hot money" into these bonds and currencies since 2002 in the midst of low interest rates and the hunt for yield. But today, I can hardly find a reason to buy these bonds following a stunning rally over the last decade.

Here's my dilemma: Why would an investor today be willing to invest in emerging market bonds? The effective yield on the J.P. Morgan Emerging Markets Bond Index is a record low 6.69%, just 186 basis points above ten-year U.S. T-bonds. If you want more bang for your buck, I'd say forget emerging market debt and buy junk bonds, or high-yield debt. Junk bonds now yield an effective 8.27% on ten-year issues and provide zero currency risk since they're denominated in U.S. dollars. I'm not bullish on junk bonds, either, but if I was hungry for yield today I know emerging market bonds would not be on my menu.

Emerging market bonds are priced for perfection and the majority of investors in this asset class have completely forgotten what can happen to the underlying currencies when things get ugly. Does anybody remember 1994? How about 1997 or 1998? These sobering periods coincided with massive devaluations and credit defaults in Mexico, Russia and parts of Asia. Then, just when you thought it was over, Argentina drops a bomb and defaults in 2001.

Timing is everything in the investment business. The long-term case for emerging markets is certainly compelling. But what history has taught investors in this asset class is that getting out early has paid-off in spades. I own no emerging market bonds and I don't plan on buying any until the next financial panic.     

The ABCs of Going Offshore

I remember when I first started in the investment business in 1991 how awfully intimidated I was when I first discovered the offshore world. Gosh, it was so overwhelming! I remember perusing The Financial Times checking-out the 4,000 offshore mutual funds listed every business day and wondering how to get started. Well, let me just say that I did eventually learn how to research those offshore funds and of course, write editorial copy and manage money, too. But it sure would have made things much easier if The Sovereign Society was around back then. Let me tell you why.

On November 8, I'll be one of the Professors at our Offshore Advantage Conference for Beginners in Puerto Vallarta, Mexico. This is THE event for anyone considering going offshore, especially if you're looking for a definitive course on the subject. Your professors next month, including yours truly, are going to cover the offshore world from A to Z, in simple terms, including a complete handbook on all key definitions and terms. Now if I had a course or an event like this to attend in 1991, believe me, it would have made my life much easier!

And things have certainly changed since the early 1990s for offshore investors. U.S. tax laws have been altered since 1997, affecting offshore mutual fund returns; post-9/11, opening a foreign bank account has literally become a chore; privacy has been attacked since 2001 and new guidelines introduced by the U.S. government affecting Americans offshore and how they invest has made owning the right securities a key strategy in your financial planning. We'll cover all of these developments and more in Mexico in simple, layman terms.   

In addition to the great information you'll receive on offshore basics -- investing, banking, insurance, company formations, tax laws, etc, you'll also get to personally meet the professors and other experts in Mexico in an informal setting. If you're more focused on trusts or estate planning, then you can spend time with experts in this area. Or, maybe you're looking for an international investment advisor or tax advisor? This is an all-inclusive Offshore for Beginner's event that I think most novices and even many experienced offshore attendees will enjoy and of course, benefit.

I hope to see you in sunny Puerto Vallarta next month!

Have a good weekend.    

Asian REITs Surge in 2006

Asian REITs are quickly emerging as the last frontier for real estate values in late 2006. With Japan's property market recovering since 2005 and booming real estate growth in China, Vietnam, Hong Kong and Singapore, investors are hoping to cash-in on the new bull market in Pacific property.

Real Estate Investment Trusts, or REITs, are currently in a secular bull market worldwide since 2000. As stocks began to submerge earlier this decade, REIT values in the United States, Canada and Western Europe began an unprecedented rally. Boosted by the devastation in common stocks, REITs attracted a massive following, drawn by the sector's fat dividend yields and rising share values. 

Turn the clock ahead five years and Eastern European REITs are now all the rage in Europe, trading at a pretty premium compared to their Western European neighbors. But the story in Asia is markedly different as the invetsment herd flocks to the region seeking better values, higher growth rates and of course, stronger economies supported by compelling fundamentals like booming trade surpluses and growing foreign-exchange reserves.

In the United States, the average REIT is severely overvalued. I'd be out of this market today. The average yield for U.S. REITs is just 4.3% compared to 4.8% for benchmark U.S. T-bonds. REITs in the United States have logged another stunning 30% return so far in 2006 compared to 15% for REITs in Asia, according to Morgan Stanley Capital International. Plus, REIT yields in Asia currently trade above the yield available from domestic bond markets -- a bullish sign that value still prevails.

I'm very bullish on Singapore over the next decade and beyond. This city-state has all the ingredients necessary to supplant Hong Kong as the next great financial and trading center in South East Asia. I plugged the country's largest REIT several months back in The Sovereign Individual (+18%) and I'm still looking for great values in other real estate markets. Hong Kong, in my eyes, is too expensive at this stage of the rally but regional neighbors are certainly more attractive, including Singapore, Malaysia, Indonesia and Thailand.

In late 2006, I'd sell U.S., Canadian and European REITs -- way too overvalued, and instead, head to safer and ultimately, far more profitable shores across the Pacific. That's where a REIT investors' margin of safety truly lies today.

 

Taiwan Looking Cheap

In a world marked by fair values at best following a massive bull-market since 2003, Taiwan is literally an island offering solid values today. I'm ready to invest in Taiwan, a country that's lagged her regional peers this year and provides the best equity values in the region in late 2006. 

Over the last several days, many international markets, including Wall Street, have surpassed their summer 2001 highs while in the emerging markets, some bourses are still hitting all-time highs almost daily. But that's not the case in Taiwan.

Taiwanese stocks still trade 45% off their all-time highs back in February 1990 while benchmark bonds in the country yield two percentage points less than the Taipei Weighted Price Index, which offers investors a 3.8% effective yield. That's a pretty fat dividend yield for a stock-market in today's low interest rate environment. The MSCI World Index currently yields just 2% while the S&P 500 Index yields a lowly 1.8%. In the United States, benchmark 10-year T-bonds yield 3% more than the S&P 500 Index. 

Stocks in Taiwan are tied to the semiconductor market, an industry that has long suffered since peaking in March 2000 along with the NASDAQ. It's been a long climb for stocks in Taipei because most technology stocks have lagged the recovery in world markets over the last three years. Yet some stocks in this prosperous nation pay good dividends, including Taiwan Semiconductor, yielding 4% per annum.

Taiwan still sports a strong economy, a budget and trade surplus and holds over $260 billion dollars in foreign-exchange reserves. Increasingly, the island-nation is also boosting its trade ties with China, a major trading partner.

For 2007, I think we'll see a broad-based recovery for technology stocks, including the semiconductor market. I also think value investors will find Taiwanese shares absolutely and relatively attractive compared to other bourses in the region.

In December's Sovereign Individual, I'll tell you how to play the big rally coming in Taiwanese stocks in 2007. I was dead-on recommending Mainland China stocks in August 2005 following a huge bear-market -- up more than 40% fourteen months later. Now, I'm growing very bullish on another neglected Asian bourse with double-digit potential -- Taiwan.